Monthly Newsletter

April 2015

SAT Strengthens Administration of Transfer Pricing in Outbound Payments

The State Administration of Taxation ("SAT") has recently issued the Announcement on Issues concerning the Enterprise Income Tax on Payments of Fees Made by Enterprises to Related Parties Overseas (the "Announcement") which further specifies the basic principles, administrative requirements and the time limit for making retrospective adjustments with respect to the payments of fees made by enterprises to related parties overseas.

The Announcement specifies that an enterprise, when making payments of fees to a related party overseas, shall abide by the arm's length principle and provide, as required by the tax authority, the contract that it has signed with such related party, as well as the materials which can prove that the relevant transaction is real and in compliance with the arm's length principle. The Announcement lists four payment scenarios which are in contravention of the arm's length principle: 1. payments made to a related party which hasn't performed its functions, assumed any risks or engaged in any substantial business activities; 2. payments of service fees made to a related party for its provision of services that cannot bring direct or indirect economic benefits to the payer; 3. payments of royalties made to a related party which merely owns the legal title to the relevant intangible assets that haven't contributed to the payer's creation of values; and 4. payments of royalties made to a related party for any carried interest arising out of the listing-related financing activities of the payer.

Measures for Administration of Food Recalls to Take Effect from September 1

The China Food and Drug Administration has recently issued the Measures for the Administration of Food Recalls (the "Measures") for implementation as of September 1, 2015.

The Measures prescribe time limits for the conduct of food recalls by food producers or traders. According to the Measures, first-degree recalls, which apply to food the ingestion of which has already caused or may cause serious health damage or even death, shall be initiated within 24 hours and completed within 10 business days from learning of the safety risk of such food; second-degree recalls, which apply to food the ingestion of which has already caused or may cause general health damage, shall be initiated within 48 hours and completed within 20 business days from learning of the safety risk of such food; third-degree recalls, which apply to food falsely labelled or marked, shall be initiated within 72 hours and completed within 30 business days from learning of the safety risk of such food. The Measures also specify the legal liability for behaviour such as the failure to stop production or trading of unsafe food immediately, failure to initiate a recall of unsafe food voluntarily or within the prescribed time limit; failure to recall unsafe food according to the recall programme, and failure to dispose of unsafe food in accordance with the regulations.

Catalogue of Industries for Guiding Foreign Investment (2015 Revision)

On March 13, 2015, NDRC (National Development and Reform Commission) and MOFCOM (Ministry of Commerce) jointly published the Catalogue of Industries for Guiding Foreign Investment (2015 Revision) (the “Catalogue 2015”), effective from April 10, 2015 and replacing the 2011 Edition of the Catalogue.

I.     Real Estate Industry

Real estate industry was in the Restriction Section of the 2011 Edition of the Catalogue, including 1. Development of tracts of land (limited to Chinese-foreign equity or contractual joint ventures); 2. Construction and operation of high-class hotels, high-class office buildings, and international exhibition centers; 3. Real estate secondary market transactions and real estate intermediary or brokerage companies.

In the Catalogue 2015, real estate industry has been totally removed from the Restriction Section, which means no business of real estate industry is restricted any more.

However, foreign investment in the real estate industry is still subject to relevant regulations which are restrictive in nature (such as the principle of commercial presence in terms of purchasing properties, the principle of project company in terms of establishing a real estate development company, recordation procedures in MOFCOM etc.). It is to be observed whether such restrictive regulations will be modified to match this change in the Catalogue 2015.

II. E-commerce

While keeping the requirements of foreign investment up to 50% in added-value telecommunication services and up to 49% in basic telecommunication services, Catalogue 2015 has no limitation on the percentage of foreign investment in E-commerce businesses.

However, since the Regulations on Foreign-invested Telecommunication Enterprises has not been modified yet, attention shall be paid to the requirements therein regarding the qualification of foreign investors and type of enterprise.

III.  Retail

In Catalogue 2015, the businesses of Direct Sales, Sale by Mail and Online Sales have been removed from the Restriction Section.

IV. Medicine, Medical Devices, and Medical Institutions

1.       Medical Institutions. Catalogue 2015 has listed again the medical institutions into the Restriction Section. Pursuant to the Circular on Carrying out the Pilot Program of the Establishment of Wholly Foreign-Owned Hospitals which was published by the authorities concerned on July 25, 2014, wholly foreign-owned hospitals are allowed in the areas of Beijing Municipality, Tianjin Municipality, Shanghai Municipality, Jiangsu Province, Fujian Province, Guangdong Province and Hainan Province. Pursuant to Catalogue 2015, foreign-invested hospitals in other areas are still restricted.

2.       Manufacture of Medicines. In general, Catalogue 2015 has expanded the items of medicines in the Encourage Section, cancelled the Restriction Section, and maintained Forbidden Section the same as before.

3.       Manufacture of Medical Devices. The items of medical devices in the Encourage Section has been expanded in the Catalogue 2015.

4.       R & D of GMOs (genetically modified organisms). R & D of GMOs is no longer in the Forbidden Section of the Catalogue. This is an important change which will have positive effect in the R&D in the bio-technology in China.